ECB Policymaker Warns More Rate Cuts Needed if Federal Reserve Doesn't Raise Interest Rates

European Central Bank policymaker Fabio Panetta cautioned that a return to ultra-low interest rates may be necessary if the ECB does not cut rates soon. In remarks on Wednesday, Panetta said the eurozone economy needs fresh stimulus from monetary policy easing to temper the risk of undershooting the 2% inflation target.

"Unnecessary delays may take us uncomfortably close to the effective lower bound at a later stage if stagnation is entrenched and inflation expectations fall below target," Panetta warned. He argued that a lack of loosening by the U.S. Federal Reserve should not pose an obstacle to the ECB taking action.

Panetta is among the most vocal ECB officials calling for urgent reductions in borrowing costs, though he advised against large steps that could jeopardize credibility. He said timely action would avoid moving to ultra-low rates and allow the ECB to be nimble and move in small, progressive steps to counter weak demand.

The ECB policymaker rejected the idea that inaction by the Fed would translate into firmer consumer price growth in the eurozone. Instead, he cautioned that delays in U.S. rate cuts could have the opposite effect, negatively impacting inflation and output in the euro area.

Why this matters: The diverging paths of the ECB and Fed highlight the challenges central banks face in navigating economic conditions. The ECB's next policy moves could have significant implications for the eurozone economy and financial markets.

Other ECB officials have also expressed growing confidence that the eurozone's 2% inflation target is within reach, indicating a "disinflation process" is underway. However, they acknowledge that the U.S. economy's strong inflation readings and the Federal Reserve's potential actions could impact the region, even as they emphasize the European economy is not entirely dependent on the U.S. The ECB is considering cutting rates at its next policy meeting in early June as it charts its own course independent of the Fed's decisions.

Key Takeaways

• ECB's Panetta warns of need for rate cuts to avoid ultra-low rates later
• Panetta argues ECB should act independently of Fed, as US inaction could hurt EU
• ECB considers rate cuts in June as it charts its own course, separate from Fed
• Other ECB officials see 2% inflation target within reach, but US actions could impact EU
• Diverging ECB-Fed policies highlight challenges central banks face in economic conditions